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Notes to the Consolidated Financial Statements
For the year to 28 February 2011, continued
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Financial Statements
The bank loans at the year end consist of a £70m variable rate Group finance
arrangement. This is due for repayment in the following proportions; 25%
May 2018, 25% May 2019 and 50% May 2020. There is a further loan of
£10m which is repayable in full on 3 August 2011.
The overdraft facility is secured on working capital and bears interest at 1.5%
above the Bank of England base rate.
The Group was in compliance with financial covenants throughout the year
and the previous year.
The book value and fair values of financial assets and financial liabilities are as
follows:
Continuing Operations 2011
Book Value Fair Value
2011
2011
£’000
£’000
Financial assets
Cash
3,937
3,937
Trade and other receivables
80,193
80,193
Financial Liabilities
Trade payables
39,488
39,488
Contingent consideration
5,000
5,000
Overdrafts
35,883
35,883
Loans and borrowings
79,119
79,119
Finance leases and hire purchase arrangements
45,045
45,045
Interest rate swap
1,501
1,501
Continuing Operations 2010
Book Value Fair Value
2010
2010
£’000
£’000
Financial assets
Cash
13,134
13,134
Trade and other receivables
60,872
60,872
Financial Liabilities
Trade payables
29,227
29,227
Contingent consideration
5,000
5,000
Overdrafts
26,436
26,436
Loans and borrowings
33,236
33,236
Finance leases and hire purchase arrangements
50,400
50,400
Interest rate swap
1,608
1,608
For trade and other receivables/payables with a remaining life of less than
one year, the carrying amount is considered to reflect the fair value.
The fair values of loans and borrowings have been calculated by discounting
the expected future cash flows at prevailing interest rates.
Fair Value Hierarchy
The Group uses the following hierarchy for determining and disclosing the fair
value of financial instruments by valuation technique:
Level 1: Quoted (unadjusted) prices in active markets for identical assets or
liabilities;
Level 2: Other techniques for which all inputs which have a significant effect
on the recorded fair value are observable, either directly or indirectly;
and
Level 3: Techniques which use inputs which have a significant effect on the
recorder fair value that are not based on observable market data.
Liabilities measured at Fair Value 2011
2011 Level 1 Level 2 Level 3
£’000 £’000 £’000 £’000
Interest rate swap
1,501
-
1,501
-
Liabilities measured at Fair Value 2010
2010 Level 1 Level 2 Level 3
£’000 £’000 £’000 £’000
Interest rate swap
1,608
-
1,608
-
During the reporting period ending 28 February 2011, there were no transfers
between Level 1 and Level 2 fair value measurements, and no transfers into
and out of Level 3 fair value measurements.
Financial Instruments - Risk Management
The Group is exposed through its operations to the following financial risks:
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Credit risk
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Fair value or cash flow interest rate risk
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Liquidity risk
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Capital risk
In common with all other businesses, the Group is exposed to risks that arise
from its use of financial instruments. This Note describes the Group’s objectives,
policies and processes for managing those risks and the methods used to
measure them.
Principal Financial Instruments
The principal financial instruments used by the Group, from which financial
instrument risk arises, are as follows:
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Trade receivables
>
Cash at bank
>
Bank overdrafts
>
Trade and other payables
>
Floating-rate bank loans
>
Income shares
>
Finance leases
>
Loan notes
General Objectives, Policies and Processes
The Board has overall responsibility for the determination of the Group’s risk
management objectives and policies.
The overall objective of the Board is to set policies that seek to reduce risk as
far as possible without unduly affecting the Group’s competitiveness and
flexibility. Further details regarding these policies are set out below:
Credit Risk
Credit risk is the risk of financial loss to the Group if a customer or a
counterparty to a financial instrument fails to meet its contractual obligations.
The Group is mainly exposed to credit risk from credit sales. It is Group policy,
implemented locally, to assess the credit risk of new customers before entering
contracts. Such credit ratings are taken into account by local business practices.
All credit sales are made under Group payment and delivery terms and
conditions and are mostly covered by insurance. All credit limits are formally
set and are in agreement with the bank.
The recoverability of the net trade receivables book is considered highly likely.
This is supported by the history of collection by the Group.
Interest Rate Risk
The Group is exposed to cash flow interest risk from long-term borrowings
and cash at variable rates. There are loan facilities at variable rates. These
borrowing policies are managed centrally. The Group has one interest rate
swap in place at the year end. Although the Board accepts that this policy
neither protects the Group entirely from the risk of paying rates in excess of
current market rates nor eliminates fully cash flow risk associated with
variability in interest payments, it considers that it achieves an appropriate
balance of exposure to these risks.
During 2011 and 2010, the Group’s borrowings at variable rate were
denominated in Pounds Sterling.
At 28 February 2011, if interest rates on Pounds Sterling denominated
borrowings had been 100 basis points higher/lower with all other variables held
constant, the annualised effect on the Group’s profit before tax fromcontinuing
operations would be £1,150,000 (2010: £571,000). The impact on retained
earnings, reflecting the after tax impact, would not be materially different.
During the prior year the Group took out an interest rate swap to manage its
exposure to interest rate risk. The Group has chosen to hedge account for this
swap under IAS 39.
Cash Flow Hedge
Financial instruments designated as cash flow hedges are held at fair value in
the statement of financial position.